An investor's intent may not always be obvious, but recently a couple's activities helped clarify their decisions for the Tax Court.

The IRS questioned the validity of a like-kind exchange made by Patrick and Jill Reesink of San Francisco. And the case ended up in Tax Court.

Sellers seeking to defer gain on the sale of real estate often engage in so-called "Sec. 1031 exchanges," which involve the exchange of one piece of real estate for another. To qualify, both properties in the exchange must be business, rental or investment properties. Personal-use property does not qualify.

Patrick and his brother, Michael, purchased an apartment building in San Francisco from their parents. Each brother had a 50 percent interest in the building. They sold the building for $1.4 million ($700,000 each).

Patrick and Jill decided to pursue a Sec. 1031 exchange with the proceeds and used most of their sales proceeds to purchase a single-family home and adjacent lot. The loan paperwork stated that the home was purchased for investment purposes.

The Reesinks posted flyers around town and posted signs on the property, advertising the home for rent. Potential renters visited the property but ultimately declined to rent it.

The Reesinks never found tenants for the property. Finally, they sold their primary residence and moved into the home that they had intended as investment property.

The IRS challenged whether the Reesinks had held the home with investment intent at the time of the exchange to qualify for nonrecognition under Sec. 1031. The Tax Court determined that, at the time of the exchange, the Reesinks had the requisite investment intent and were entitled to nonrecognition treatment.

The court found that the Reesinks had engaged in extensive advertising efforts, showed the home to potential renters and waited almost eight months before moving in. Their decision to purchase the home - although it may not have been "financially sound" - did not negate their investment intent.

Jill Reesink testified that she was reluctant to leave their home in San Francisco and never discussed moving to the new home until after the exchange had been completed.

The IRS disputed only whether the Reesinks had held the home with investment intent at the time of the exchange. Therefore, the court did not address whether the acquisition of the new home met the mechanical rules for a Sec. 1031 exchange, such as timing requirements and the use of a qualified intermediary (Patrick A. Reesink, et ux. v. Commissioner, TC Memo 2012-118, April 26, 2012).

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